Abstract
This chapter investigates whether modern economics’ shortcomings with respect to inclusion, sustainability and resilience—its treatment of living standards as a residual consideration—can be attributed to the original conceptualization of liberal political economy or a subsequent misapplication of its founding principles. It finds that the discipline’s most influential early theorists and codifiers—Adam Smith, John Stuart Mill and Alfred Marshall—explicitly contextualized their insights about the power of market-based resource allocation in a larger perspective and complementary set of prescriptions. These emphasized the important role of institutions—legal and other norms, policy incentives and public administrative capacities in multiple domains—in helping to translate the increased economic growth enabled by market-based resource allocation into broad improvement in social welfare. Each of these pioneers considered increased production and national income, the wealth of a nation, as a means and not an end in itself. Each emphasized that the ultimate purpose of an economy is to advance the material well-being, or standard of living, of society as a whole. The chapter makes extensive reference to their original texts and traces how their shared view of the crucial institutional underpinnings of inclusion, sustainability and resilience got lost in translation during the evolution of eighteenth- and nineteenth-century political economy into twentieth-century economic science.